Asset-based inventory lending is a common form of financing of assets and accounts for about one-third of all U.S. commercial and industrial loans. Typically, importers/distributors/dealers/retailers need to maintain a complete stock of assets or merchandise to meet customer expectations. However, large stock levels of merchandise tie up significant amounts of working capital. Hence, a financial institution or lender provides a loan to such companies. Such loan is to be repaid as soon as the merchandise is consumed or disposed. This is different than the traditional bank line of credit that takes the merchandise as backup collateral. An asset-based inventory lender considers the merchandise to be the primary source of repayment. Asset-based inventory lending is well suited to highly leveraged importers/distributors/dealers/retailers active in industries in which the merchandise moves rapidly, as opposed to more slowly-transacted assets such as real estate.
In one form of asset-based inventory lending commonly known as “floor planning”, the lender provides a revolving line of credit that allows a borrower to obtain financing for retail assets. The line of credit is made against the specific assets. As each asset is sold, the loan advance against that asset is repaid. Thus, floor plan financing allows businesses to borrow against retail inventory. The borrower then repays that loan as their inventory is sold and borrows against the line of credit to add new inventory. The lender sends the proceeds of the loan directly to the asset manufacturer and takes a purchase money security interest in the inventoried assets.
Floor planning is quite common in the automobile industry. New and used automobile dealers have hundreds of automobiles on their lots. Few dealers own the automobiles on their lots. Most automobiles are floor-planned by a bank or other financial institution, which may also provide loans to buyers when the automobiles are purchased. Floor-planning costs can run into hundreds of thousands of dollars a month for a big multi-location dealer with large automobile inventories. The dealer uses a lender's funds to gain possession of the automobiles and, until each automobile is sold, the lender holds title to the automobiles. When the dealer receives payment from the buyer, the dealer remits the loan to the lender who then releases the title to the automobile to the buyer. With a floor-planning arrangement, a used automobile dealer may go to auctions (or take trades) and have their inventory without paying for it right up front. This is extremely helpful for small dealerships that do not have the money to pay for the automobiles in advance.
Floor planning is important because it is far easier to sell merchandise in stock, i.e., “on the floor”, as opposed to selling the merchandise from a catalog, or from an advertisement placed by the manufacturer. Floor-planning dealers typically enjoy increased sales and profits for this reason. When a piece of merchandise from a manufacturer is received by the dealer who has a floor-planning arrangement with a lender, the lender sends the manufacturer a check for the merchandise piece. Therefore, the manufacturer does not have to worry about when the merchandise piece is sold to the end buyer, thereby reducing costs. Examples of other merchandise commonly financed by floor planning are recreational vehicles, boats, motor homes, major appliances, manufactured homes, farm equipment, furniture, televisions, stereo equipment, computers, other high value items, and other types of merchandise usually sold under a sales finance contract.
In another variation of asset-based inventory lending, warehouse receipts financing is used by businesses that carry large inventories composed of finished goods or raw materials with a good disposal market. With warehouse receipts financing, inventories are placed in a bonded warehouse as security for loans. As a business draws inventory from the warehouse, the loan is paid back to the lender.
Asset-based inventory lending involves all the basic risks inherent in any form of financing. However, because of the lender's inability to exercise full control over the floored assets or merchandise at the borrower's site or inventory locations, the exposure to loss is generally greater than in other types of financing. It is important for the lender to review the number of merchandise units sold and the number of merchandise units in inventory at any given time at each inventory location to determine the corresponding collateral value. Unlike most collateral on loans that is mostly static, the retailer is in more control over the collateral under a floor-planning arrangement, and that makes it harder for the lender to control because the collateral will fluctuate from day-to-day. For that reason, the lender must audit or check the inventory of the borrower often to make sure that the loan remains adequately covered.
Thus, an inherent weakness in any inventory-based loan is the lender's inability to exercise full control over the collateral. Sometimes the inventory is sold, but the lender's loan is not repaid. The dealer/retailer in this case may be taking advantage of a float, i.e., using proceeds of sold inventory before remitting the payment to the lender promptly, as required by the floor-planning agreement.
In order to assure that asset-based financing is not being misused by the borrower in any manner, it is known for the lender to require reliable, timely financial and inventory reporting and weekly/daily collateral reports. The lender may also require the buyer to submit to regular inspections, audits, or appraisals by independent third parties. The lender may periodically visit the dealer on-site to count the units of merchandise in inventory and/or review sales records and other documents to ensure that the dealer is remitting payment to the lender as soon as the merchandise units are sold.
However, even assuming cooperation with the dealer/retailer/warehouse/borrower, it has proven difficult to perform such audits in an accurate, inexpensive, and timely manner. The assets may be at different geographical inventory locations. The assets can often be rapidly and hourly moved from one place to another. The assets can frequently be converted to cash and can thereupon be difficult to identify without physical inspection. The lenders and the retailers/dealers are normally at different locations and, without actual travel and on-site inspection by an auditor or trusted agent of the lender, it is simply not practical to accurately, inexpensively, and timely identify the presence or absence of any one or more assets at a dealer/retailer/warehouse/borrower site.
Locating assets in situ at a dealer/retailer/warehouse/borrower site is, therefore, of paramount importance to protect the interests of lenders. Lenders have tried various methods to assure that their loans against their collateral inventory are appropriately safeguarded. Some of these methods deploy outside auditors and surprise auditing visits. Sometimes, lenders will work only with trusted and authorized distributors/retailers. Other methods use seals, markings, or cryptographic certificates of various kinds to assure inventory integrity and security. For example, bar code symbol labels or radio frequency identification (RFID) tags have been used to track assets. A label/tag is affixed to an asset and is read by machine-readable readers or scanners at designated locations. For example, labeled/tagged assets at an automobile dealer or at a distribution center can be read and identified by a scanner, and this information is stored in a database.
However, unscrupulous dealers/retailers have become quite sophisticated in thwarting these methods. RFID tags can be easily compromised, and bar code symbols can be easily copied. A dishonest dealer/borrower can copy a bar code symbol on a label and/or tamper with an RFID tag, sell the labeled/tagged asset, and continue to scan the copied bar code symbols and compromised RFID tag, and send the copied information to the lender as fake proof that the dealer/borrower still has the asset. Lenders have tried to modify and combine bar code symbols, RFID encryption, decryption, and other and similar approaches to further strengthen the audit. However, none of these approaches have proven to be effective in preventing fraud. As a result, serious problems continue to plague the security and integrity of such inventory audits
Accordingly, it is desirable to make available to lenders an easy, fast and foolproof system to remotely audit their inventoried assets at any inventory location in an accurate, inexpensive, and timely manner.
Skilled artisans will appreciate that elements in the figures are illustrated for simplicity and clarity and have not necessarily been drawn to scale. For example, the dimensions of some of the elements in the figures may be exaggerated relative to other elements to help to improve understanding of embodiments of the present invention. Some of the elements may be combined into smaller subsets or further broken down during implementation.
The system and method components have been represented where appropriate by conventional symbols in the drawings, showing only those specific details that are pertinent to understanding the embodiments of the present invention so as not to obscure the disclosure with details that will be readily apparent to those of ordinary skill in the art having the benefit of the description herein.